It’s looking more likely that the stock market could head sideways for some time, making dividends a more important part of the equation for portfolio returns.
Dividend investing comes in various forms. Investors can look for stocks that offer the highest yield, names with a history of stable dividend payouts and strong finances, or companies that are raising dividends.
For this article, we screened for stocks that have increased their quarterly dividends, which can be a sign of a company’s confidence in its future finances. We combined this screen with one for stocks that are trading below their Morningstar fair value estimates, meaning they have attractive prices for long-term investors. These stocks offer investors the potential to benefit from both increased dividend yields and the possibility that their investment values will grow.
Six Undervalued Stocks With Dividend Increases
- Williams-Sonoma WSM
- Comcast CMCSA
- ManpowerGroup MAN
- Discover Financial Services DFS
- Qualcomm QCOM
- Microchip Technology MCHP
How We Screened for Stocks With Increased Dividends
We started with the 654 U.S.-based companies covered by Morningstar that pay a quarterly dividend to investors. We then tracked changes between any dividends paid during the first quarter of 2023 and the most recent dividends for the second quarter.
From there we filtered for companies that saw a dividend increase of 5% or more to capture the most substantial changes. Stocks with dividend yields under 2% were then excluded from the group. After that we picked companies considered undervalued by Morningstar analysts, meaning they are rated 4 or 5 stars.
Only six companies made the cut.
Here’s what our analysts had to say about them:
- Annualized Dividend per Share: $3.60
- Dividend Yield: 3.06%
- Discount to fair value estimate: 44%
“Williams-Sonoma has carved out a solid position in the $750 billion global home category and the $80 billion U.S. business-to-business industry (according to the firm). It has historically launched most of its brands organically in underserved segments, and its brand intangible asset has been the key factor in its top- and bottom-line growth. Its ability to drive repeat business relies on customer loyalty and smart marketing and merchandising, and the firm has access to some of the best analytics in retail. This should help Williams-Sonoma outperform its competitors and grow its market share, aided by new category expansions.
“In recent years, Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture and home furnishings via B2B and marketplace efforts—categories with robust end markets that remain fragmented. These white-space business lines, along with faster growth from the franchise and e-commerce channels (which accounted for 66% of 2022 sales) should help the firm reach $10 billion in sales in 2028.”
—Jaime M. Katz, senior equity analyst
- Annualized Dividend per Share: $1.16
- Dividend Yield: 2.92%
- Discount to fair value estimate: 34%
“Comcast’s core cable business enjoys significant competitive advantages, but will likely see growth slow as competition for incremental customers heats up. NBCUniversal isn’t as well-positioned, but it holds unique assets, including core content franchises and theme parks, that should help ease the transition away from the traditional television business. Overall we expect Comcast will deliver modest growth with strong cash flow for the foreseeable future.”
—Michael Hodel, director of equity research, media and telecom.
- Annualized Dividend per Share: $5.88
- Dividend Yield: 8.03%
- Discount to fair value estimate: 28%
“We think Manpower will remain one of the largest global staffing firms in a highly fragmented industry. The company is one of only three diversified global recruitment providers, alongside Adecco and Randstad.
“We expect Manpower to continue shifting toward higher-value solutions and services, such as its Talent Solutions and Experis brands. This shift is easier said than done, but Manpower has made gradual improvements in recent years, and we believe there is room for it to grow. Furthermore, we think Manpower will maintain the shift to higher-margin human resource solutions as multinationals increasingly look to outsource large-scale recruiting activities. We think growth in these areas will provide a runway for Manpower to improve profitability while reducing the overall cyclicality of its businesses. Manpower will also benefit from European governments’ pro-employment policies.”
—Joshua Aguilar, senior equity analyst
Discover Financial Services
- Annualized Dividend per Share: $2.80
- Dividend Yield: 2.57%
- Discount to fair value estimate: 25%
“After more than two years of little to no receivable growth and credit losses well below normal levels, Discover was able to generate impressive loan growth in 2022. On the other hand, while credit costs have normalized slower than we expected, there are clear signs that investors should expect higher net charge-offs from Discover and other credit card issuers in 2023. We do not expect this to put any pressure on the bank’s balance sheet, though, as the firm is in a strong financial position with good reserves.
“Additionally, Discover’s net interest income will benefit from a larger credit card receivable base now that growth has returned. The bank ended December 2022 with more than $91 billion in credit card loans—21% higher than the prior year.”
—Michael Miller, equity analyst
- Annualized Dividend per Share: $3.20
- Dividend Yield: 2.84%
- Discount to fair value estimate: 19%
“We expect Qualcomm’s chip business and licensing business to continue to generate healthy cash flow and reinforce the company’s narrow moat rating, as it should remain an industry leader in chipsets and IP for 5G and below. Apple’s decision to build its own baseband chips, or modems, to displace Qualcomm should be a medium- to long-term headwind, but not a death blow, especially as Qualcomm is poised to grow in automotive and Internet of Things semis. In licensing, Qualcomm has been able to withstand a host of government inquiries and customer pushback in recent years, and we think the licensing business will maintain a hearty stream of high-margin royalty revenue over time.”
—Brian Colello, director of equity research, technology
- Annualized Dividend per Share: $1.53
- Dividend Yield: 2.04%
- Discount to fair value estimate: 16%
“Microchip is a leading supplier of microcontrollers, or MCUs, which are semiconductors that act as the brains in a wide variety of common electronic devices, from garage door openers to electric shavers to home appliances like dishwashers. We view Microchip as one of the best-run firms within the chip space, and we like the firm’s ability to generate free cash flow under virtually any economic scenario.
“The businesses of MCUs and analog chips have many desirable features. Neither type of chip is overly dependent on leading-edge designs, so capital investments tend to be relatively low. These chips are selected based on performance rather than price because they make up only a tiny portion of a product’s overall cost. Customers tend to be loyal, and chips have long product lives because switching to a competing MCU could involve redesigning the entire end product. Thus MCU and analog firms are able to maintain high margins and returns on invested capital.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.